‘(1) In relation to NEST, the Government must by 31 December 2013 notify the European Commission that it wishes to lift the ban on transfers and the contribution cap.
(2) The Secretary of State must make a statement to Parliament within 14 days of the Government notifying the European Commission in accordance with subsection (1).’.—(Gregg McClymont.)
I beg to move, That the clause be read a Second time.
New clause 4 refers to NEST, which has been in the news because, as your fellow Chair pointed out to us on Tuesday morning, Mrs Main, the Minister has announced in a written ministerial statement that the Government intend to legislate now to lift the contribution limit on NEST from 2017. The statement also says:
“Therefore we intend to lift the restrictions on individual transfers in and out of NEST to coincide with the start of the ‘pot-follows-member’ regime.”
On the one hand, therefore, the contribution limit will be lifted from 2017 by legislation; on the other, the restriction on individual transfers in and out of NEST will coincide with the beginning of the “pot follows member” regime.
One way to characterise the measures new clause 4 would enact is that they urge the Government, once more, to hurry to get the restrictions on NEST lifted. The Government’s decision to legislate now but not lift the restrictions until 2017 and not lift the ban on transfers in and out until “pot follows member” begins—whenever that might be—is a problem; let me say a little as to why. Specifically, there is a problem with how the decision to lift the restrictions and take off the cap interacts with the ability to transfer in and out.
As things stand, the Minister’s view is that he will legislate now for the cap to come off in 2017 and the restrictions on transfers will be lifted when “pot follows member” gets under way. Without putting words in his mouth, it would seem that his view is that legislating now gives employers clarity that, by 2017, the restrictions will be off, which is useful for any employer who is thinking about using NEST for auto-enrolment. He would also seem to hold the view that the contribution cap relative to the percentage contribution is so high that it will not put any of those employers off.
The problem comes when that situation is put alongside the continuing ban on transfers in and out. In my judgment, the ban means that any employer who is thinking about using NEST and currently has a pension scheme of any type will be discouraged from using NEST, because they cannot transfer their current pension assets in. The Minister’s view is that, although the restrictions do not come off until 2017, they will not bite any employer wishing to join NEST between now and then. That is right; the problem is that an employer with an existing pension scheme cannot transfer in their employees’ existing pension assets. The Government are encouraging employers to use NEST, but by not lifting the ban on transfers in and out right away they are discouraging those employers who currently have a scheme.
Let me explain a little more why that is the case. The income cap will not be such a problem up to 2017; I agree with the Minister about that. The problem lies in the continuing ban on transfers in and out. DWP research has found that over 80% of employers want one provider, which is understandable. The ban on transfers in, however, means that NEST is stuck: until it is lifted, NEST will be unable to sign up employers who already have a pension scheme.
The DWP anticipated that problem last week by saying that 84% of employers with fewer than 250 employees provided no workplace pension so would not be affected by the continuing ban on transfers in. However, recording that based on employers is not a good proxy for employees. Of course, NEST’s duty is to serve employees on low and medium incomes and companies of all sizes, not just SMEs. Has the Minister fully considered that?
New clause 4 obliges the Minister to notify the European Commission of his desire to lift the ban on transfers in and out and to lift the cap on NEST. Specifically, the new clause remains important because, although the Government take the view that announcing the lifting of the restrictions now, even if it does not bite until 2017, encourages employers to go into NEST, the problem lies with employers who currently have a pension scheme but who would like to take their employees into NEST. While there remains a ban on transfers in and out, those employers cannot use NEST or can only use NEST by leaving those existing pension pots in a stranded place. Has the Minister considered that aspect of his decision on NEST and how it pertains to our desire in new clause 4 for him to go ahead and get the restrictions lifted before 2017?
I am pleased to have the opportunity to discuss the future of NEST, which has been a real success story. There is a misapprehension that the only measure of NEST’s success is the number of members that it attracts. We still think that NEST will attract well over 2 million members, so it will be a very big pension scheme, but it is one of those strange things that NEST benefits not only its members but people who are not members. We have seen that in a number of ways. Relating to our earlier discussions on charges, the fact that NEST has a charge equivalent to 0.5% has led to a lowering of charges. In other countries where, for example, charge caps are talked about, one of the arguments against such caps is that people will level up to a higher figure. With NEST in the market, we have a constant benchmark.
We think that NEST is crucial and that it has been a success. One of the reasons why it has been a success is that it has had to do what other pension providers have not had to do, which is concentrate on a target market. The target market is particularly lower and middle earners and people who work for small firms, which are the groups that have historically been poorly served by the private pensions market. Having a provider that caters for that market is good, and the previous Government’s decision to constrain NEST was right—this is another classic example of where the hon. Gentleman has spent the past year or so demanding that I undo what the previous Government did. I agree that the previous Government’s decision was right, because it has forced NEST to focus on the target market. How have we seen benefit from that? First, annuitisation.
I do not know whether we will get to new clause 7, but we agree that annuitisation is an important issue. NEST has, for example, essentially set up an annuity bureau or broking service so that its members, when they reach pension age—in the early days, they will reach pension age, or the age at which they want to draw their pension, with relatively small pension pots—will be able to find someone who will give them a good deal. NEST is assisting its scheme members in doing that, including through providers who will provide annuities for very small amounts. Frankly, the market tends to turn its nose up at some of the amounts involved. NEST has innovated in supporting its members in that way.
The second way that NEST has innovated because of its constraints has been on language. It will shock the Committee to know that not everyone understands pensions language, and NEST has come up with a vocabulary of things that work. One of its no-no words is “vesting,” which is a pensions jargon word that people should not use because nobody knows what it means. Unfortunately, it turns out that “pension” is a bit of a no-no, too. Apparently the word does not help people very much. I have suggested to the Prime Minister that I might be renamed the Minister with responsibility for retirement solutions, but I have not yet had a reply to that letter. We certainly need to think about language that works effectively because, in a sense, NEST is dealing with the previously unpensioned, which is an important phrase in response to the hon. Gentleman’s question on bulk transfers. NEST was not set up primarily to provide pensions to people who already have them. I will come back to that point, but it is relevant to his point on bulk transfers.
NEST is trying to communicate with people who do not do pensions, and it has encouraged the industry. NEST is not the only company that has thought about language; other providers and the Department have worked very hard on that, too. The consequence is that something that people thought was impossible—getting 20-somethings to save in a pension—has proved far easier than we thought. The early signs from automatic enrolment are that the opt-out rates are stunningly lower than was thought, and that young people are no more likely than their older peers—indeed, slightly less likely—to opt out.
Thanks to NEST and automatic enrolment, 20-somethings are saving in pensions. I have heard from a number of employers that because the lower age limit for automatic enrolment is 22, 21-year-olds and 20-year-olds working for firms have demanded to know why they have been missed out, and have insisted on being put into the pension scheme. Getting to a situation where 20-year-olds are demanding to be put in a pension scheme means that something must be going right. NEST deserves a lot of credit for that.
NEST has also worked on how small businesses think and operate. For example, a sole proprietor or the owner of a small business with only a few employees might do their books on the kitchen table of an evening. When the phone goes, they will answer it and then come back to the website. NEST has set up its website so that when users go back into it, they go back to where they had got to, rather than having to go through all the process again. Those are just some examples of how the constraints on NEST, about which we made our announcement this week, have performed an important function.
Six months into automatic enrolment, it seems odd to us, the constraints having worked, to lift them immediately.
Indeed I did. I am coming to that point, as I think that that is her colleague’s position.
Given that the constraints on NEST were a good thing, as I have just explained, it is not clear why we do not want them to go on being a good thing. We have not yet got to the section of the market that NEST was primarily designed to serve. So it seems odd, having set up a provider to focus on a particular section of the market and meet its needs, to lift the constraints that were designed to ensure that it served that section of the market before we get to that section of the market. It is very odd to do it at that time, rather than when we have had the first phase of auto-enrolment.
I do not think that that explanation is correct. It is true that take-up of NEST by the largest employers has been slightly lower than was originally modelled, but NEST membership is accelerating. I believe that it is at about 250,000 already and is rising rapidly. However, it is important to say that many major employers, such as BT and the BBC, if I remember rightly, have combined NEST with their existing offer. To be honest, running two schemes together is not a substantive challenge to the giants of British industry that have been enrolling so far.
What has happened, which is welcome, is that there has been fierce competition. Other providers have recognised that once they get in, they are likely to be there for the long haul. On the whole, firms do not churn their pension provider; there are big costs to doing so. Some providers have struck really good deals for employers. NEST obviously was not at liberty to compete in quite the same way, but I am encouraged by how its projections and numbers are looking. As I said, we still expect them to be within the 2 million to 4 million range that we estimated when we first started.
To be clear, we not only listened to what the Select Committee said, we undertook our own review, “Making Auto-Enrolment Work”, which included representatives of employers and the industry and economists. We had a call for evidence on the NEST review, because evidence was in slightly short supply. A lot of people had opinions; a lot of people thought they knew what was going on. However, the evidence that we found on the NEST constraints was that, although in theory the contribution limit could be an issue, for as long as the statutory requirement was 2% of a band of earnings, someone would have to be earning £250,000 and pay contributions on the whole lot to hit the limit.
Obviously, people on £250,000, on the whole, have pensions. It was not an actual issue for many firms; it was a potential issue when the contribution rate rose to 5% and 8%. That is why we have announced now, in the document to which the hon. Gentleman referred, that before the statutory contribution rate rises to 5% and then 8%, the contribution cap will be lifted. That seems to strike the right balance between giving certainty to people now, because, without this announcement, we would have had a review in 2017—I cannot remember which Government legislated for it; it might have been in 2008—with more uncertainty, and we wanted to give certainty so that a firm today can decide to use NEST.
The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East asked about bulk transfers. If a firm has an existing pension scheme, existing employees can already be in it—therefore satisfying the auto-enrolment requirements, assuming it is an adequate scheme—and the unpensioned employees can be auto-enrolled into NEST. In 2017, if a firm wants to, it can do a bulk transfer into NEST. I do not see any problem with that. Any employer who wants to do that will be able to do so, so I do not accept the hon. Gentleman’s point.
It is a rare thing in the pensions world to be able to unite the TUC and CBI in support of what we have done. Although the TUC would have liked an immediate lifting of the constraints, Frances O'Grady generously said:
I am grateful to her for those comments. The CBI stated that:
“the Government made a sensible decision by sticking to its original timeline.”
I must quote the ABI:
“This is a sensible way forward which will command the support of the industry.”
The NAPF stated:
“There might have been a case for lifting these barriers earlier, but doing so from 2017 provides the clarity and certainty that employers, savers and the pensions market all need.”
I have a long list of similar quotes. Given that we were trying to strike a balance between making sure NEST focused on its target market, but making sure that as many people as possible could benefit, I am heartened by the generous responses that we have received.
I think the hon. Gentleman’s position is that we should announce that we are lifting the cap now. I am sure he will intervene if I am misrepresenting his position, but that is my understanding. There is a problem with that. Paradoxically, that would create uncertainty and limbo. Imagine a pension provider had come into the market to compete, and then after entering the market and perhaps incurring set-up costs, the Government changed the rules in favour of the state-subsidised provider. I think there is a risk that that might have been challenged, possibly by the European Commission.
If the decision that the hon. Gentleman wants to take had been challenged by the European Commission, we could not have lifted the constraints. We would have been in limbo for nine months—who knows how long? We might have lost and then the constraints might have been with us for ever. Even if, at the end of the day, we had been successful, we would have had a nine-month or 12-month limbo when no firm would have wanted to choose NEST, because of the uncertainty about constraints. I do not know why the hon. Gentleman shakes his head. Unfortunately, we have to make decisions in the real world where we face legal challenge if we do not make the decisions properly.
Imagine a NEST salesman or saleswoman going out and trying to persuade a company to sign up for NEST, and it has just been announced that the European Commission is investigating the Government’s decision prematurely to lift the constraints. The salesman cannot tell the firm whether there will be constraints or whether they will be lifted. If we are worried about the take-up of NEST by firms so far, that sort of hiatus could have been devastating for NEST. Although it would have got me a nice cheap populist headline on day one that said how nice I am—NEST is good; everyone should be able to get into NEST; I’m lifting the restrictions and aren’t I great?—on day two I would not have been quite so popular. The people who would have lost out would have been the people who could otherwise have gone into NEST and got a good value low-cost pension scheme.
I hesitate to describe the hon. Gentleman as seductive; I do so only metaphorically. Although his arguments are seductive, there is a suppressed syllogism, which is: NEST is good; everyone should have access to good things; therefore, lift the constraints. Unfortunately, the real world is a bit more complicated than that. Therefore, in response to the call for evidence in the past week or so, we have published a measured and reasoned response to the constraints that were rightly put in place by the previous Government.
In a sense, precisely because NEST is succeeding and doing its job, we want it to carry on, but we also want to remove uncertainty from the market. The 2017 review date was already in law, but rather than wait until 2017 and then have a further period of uncertainty while we waited for the review to complete, we felt that, as many stakeholders have said, resolving that uncertainty now was the best thing to do.
Finally, the hon. Gentleman asked about bulk transfers. We need a bit of perspective here. There are 1.2 million small and medium-sized enterprises. We estimate that only around 1% of those 1.2 million have a scheme that could be transferred in bulk. They can transfer the scheme after the April 2017 date, but it is critical that NEST and the industry concentrate on the crucial next stages of automatic enrolment. It has been a success story so far, partly thanks to a huge amount of effort, partly thanks to employers’ high-quality communications. It has been a success thanks to the Government’s very successful “I’m in” campaign in collaboration with excellent trade bodies such as the NAPF and the ABI.
We do not want NEST, which was not set up to take bulk transfers until 2017, spending time getting its systems ready for bulk transfers now. We want NEST to be focused on getting people auto-enrolled, not on moving people who already have pensions from one scheme to another, which they can do in a few years’ time anyway. I hope that the hon. Gentleman will reflect on the fact that the seductively simplistic approach is not always best. That is perhaps a moral—if I may return to that tone—that he may want to reflect on more widely.
Another sermon from the Minister, who edged towards being patronising there. For the first time, apparently, I do not live in the real world but the Minister does. I reject that analysis wholeheartedly, and I will tell him why.
First, the Minister referred to the fact that good offers are now available under auto-enrolment. Let us be clear: by the time the NEST restrictions are lifted by the Government, according to its timetable, auto-enrolment will be complete. The staging dates will be completed. What he is actually doing with his decision on NEST is ensuring that the restrictions on it remain until every employer has staged. That is an important fact.
The Minister also tends to conflate SMEs with low and medium earners. NEST is supposed to deliver for all low and medium earners, not just those who work in SMEs. He also referred to the success of NEST, and gave credit to a number of institutions and bodies, but I note that he did not mention the previous Government, who created NEST. If he was in a more generous frame of mind, I am sure that he would have mentioned that both auto-enrolment and NEST were created by the last Labour Government.
The Minister referred to the restrictions that that Government put in place. I agree with him that there was a good case for having restrictions before it was clear how the market was progressing. The insurance industry said, fairly, that it did not know how competition would work in the new auto-enrolment marketplace, and that we had to be careful that the new state-backed scheme did not take all the business. That was a perfectly fair position, but the point is that the auto-enrolment market is well under way and NEST has not taken all the business. The market is very competitive, and the restrictions have meant that NEST has been able to get less of that low and medium-earning segment than it otherwise would.
I am surprised that the Minister mentioned the TUC, because I assumed from his previous comments that the NAPF was my greatest friend. My view is that the restriction should be lifted now, and I am going to continue to make that argument. The Minister does not mention his rather unconvincing argument from a year ago, although he touched on it, which was that he might face a legal challenge. What is the difference between the situation now and in 2017? If a provider thinks it is unfair under law to lift the restrictions on NEST now, why would it not be unfair in 2017?
I cannot speak for providers, but clearly any provider considering legal action also thinks about its corporate reputation. While challenging us now if we had lifted the restrictions four years early, lifting them when everybody thought they were going to be restricted anyway, would be regarded as unexceptional.
Deeply unconvincing. The Minister’s grasp on European law strikes me as less strong than his grasp of aspects of the pensions system. The fact is that if these restrictions were considered by law to be necessary, and to lift them would be unfair, that would be the situation 2017 as it is in 2013. Accepting the Minister’s argument for a moment that there would be a challenge—and I do not accept that for a moment; that is just the Minister’s opinion—the idea that the Government should make their decisions based on—
I will give way in a moment when I have finished my point.
The idea that the Government should proceed in decisions like this on the basis that they might, without providing any evidence, face a legal challenge is, again, unconvincing. The Minister first described it as seductive, in a metaphorical sense, and I am pleased that he added that important disclaimer or caveat, and then suggested that perhaps I did not live in the real world. First, and I repeat the point, the Minister thinks that by announcing the intention in legislating that the restrictions will be lifted in 2017, no employer who wishes to use NEST will be put off. The problem is that the Minister says that it is not part of NEST’s job, but it is to serve all low and medium earners. If there is a business that is interested in using NEST and it has any kind of current pension scheme, it cannot now transfer into NEST without leaving stranded pension pots behind. That is a very important point.
Finally, the Minister mentions the figures, but the number of employees excluded from going into NEST as a result of the ban on transfers in is more than 11 million employees.